Bitcoin Analysis: Week of Sep 28 (Wealth Management Pt. II)

The week of September 28th Bitcoin Analysis by Tone Vays.

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Bitcoin Analysis: Week of Sep 28 (Wealth Management Pt. II)

Note From the Author: Next Week’s report will most likely be delayed, as I will be a speaker at Inside Bitcoins Vegas Conference Oct 5-7.

Last Week’s Review

In last week’s post we concluded with the following statement:

Our overall stance has been altered to Long-Term Bearish (though the downside is somewhat limited here), Intermediate-Term Bearish but Short-Term Bullish.  We are looking for a potential bounce in prices back to the US$440-460 levels where the most likely outcome from there would be continued selling pressure. 

More information was present in the conclusion, but because the primary case turned out exactly as predicted, there is no need to re-print it here. Of course the PayPal news came as complete surprise to everyone, including the Bitcoin news websites who were not even the first to the scene. Within hours after the news broke, the price rallied right into our expected resistance zone and topped out at around US$452. The news was definitely big enough to make the price break out to higher levels but it was not in the cards and in this report we will continue to analyze why the price is under continued downward pressure. As usual let’s take a quick look at the big picture.

The Long-Term views remains looking weak. This is now the 9th consecutive week where the high was not able to overtake a previous week’s high. One of the few positives to consider is that this pattern of weakness for 9 weeks is a good case for a momentum reversal indicator called TD (named after the creator Tom Demark). The indicator will eventually be covered in the Educational section, but those interested can read about it early. The overall look however, is still showing a high probability that we will re-test the yearly lows around US$350 and even have an outside chance of falling to April ’13 Bubble top of US$266.

Education (Long Term Investing)

Last week this section was used to go into details about actively trading bitcoins. Trading of course is not for everyone and is something only few can successfully do for a living. The more likely scenario and one advise here is just investing, so the case needs to be made as to why someone should buy bitcoins, how much one should own, how they should own it, and what are the reasonable expectations.

The case for buying bitcoin is simple to make for those that do not trust government printed fiat currencies, those who believe in technology and those who like tacking on personal responsibility because no one is going to keep your bitcoins safe for you. The majority of the world will not see it this way for now, but that’s ok. If Bitcoin is the future it just needs to survive in its current form until the next financial crisis or a country deciding to confiscate people’s money like the event in Cyprus back in March 2013. Held properly, bitcoins are the only asset no government can confiscate from you and that in itself makes it a very valuable hedge against all political events.

To begin answering the question of how much one should own, the following has to be answered first. How much are you willing to lose? Bitcoin is still a technological experiment with lots of moving parts. You should treat it like any other asset though the one that probably comes the closest for comparison are Physical Gold and Silver. It is recommended that about 10-20% of a person’s net worth should be held in Physical Gold and Silver so it seems perfectly reasonable for someone to do the same with bitcoins.

To answer the question of how one should hold bitcoins it should be straightforward but it’s not. The one major advantage that bitcoin has on Gold or Silver is that a person can securely hold bitcoins on their own and not worry about theft. 90% of cases from Mt. Gox to ‘Bitcoin Savings and Trust’ of where a person’s bitcoins were stolen were the results of trusting others with your private keys. Yes it involves a little education and a lot of responsibility and even if you are not savvy enough yet to keep a chunk of your bitcoins in ‘cold storage’, just having them on your computer where you are the only password holder significantly increases the chances of them being there when you need them.  You can always disconnect your device from the Internet and this becomes almost the equivalent of ‘cold storage’. So for those that care about their Bitcoin future, please transfer anything you consider ‘savings’ from online wallets such as exchanges or convenient services like Coinbase. Having revolving amount used for trading or weekly spending is perfectly fine, but your savings should only be in your posetion.

Finally let’s attempt to quickly go over reasonable expectations. This can easily be a stand-alone article but hitting the highlights, no one should expect the price of a bitcoin to be $10,000 next week. Can it happen? Of course it can. One catalyst for this move was mentioned earlier and will be further broken down in future articles. A banking confiscation would certainly do it and the most likely suspects are places like Italy, Spain, Portugal or even France. Another such catalyst might be a country like France or even US or Canada implementing an 80% tax rate on those they consider ‘The Rich’. Yet another ‘debatable’ catalyst might be a country like US banning Bitcoin like they did Alcohol back in 1920. All of these scenarios are fun to think about but coming back to current reality we have constant question marks about regulation and what feels like a split within Bitcoin Community between those that want Bitcoin to remain away from those currently in power and those that want to make it more mainstream because they think it helps adoption. As mentioned in this series several times in regards to PayPal, it might seem like a good idea and perhaps it is from a PR perspective in that bitcoin is becoming more legit and mainstream, but from a price perspective, it is one of the worst things possible outside of Mining or Bitcoin Core Code problems.

Fundamentals & News

The news of the week was of course PayPal’s implementation to bring Bitcoin payments to its 100 Million or so merchants that are currently on PayPal’s platform. As argued a few weeks ago as to why this implementation would be a bad thing for the Bitcoin Ecosystem and especially Bitcoin’s price, that view has not changed and some major things need to go right in the near future for this not to significantly drive prices lower. Global dynamics are complicated and interconnected. The biggest knock on Bitcoin is its volatility so a lot of people in and out of the Bitcoin circles believe that if only it can be stable and regulated and approved it would be great for the Bitcoin Ecosystem and price, but these are contradictory ideas. Bitcoin is not very useful in a stable regulated world: when everyone is fat and happy why do you need a revolutionary medium of exchange that can end the current financial system as we know it?

This series is not an analysis of Bitcoin’s Moral Standing in the world, it is a Price Analysis and what is best for Bitcoin’s price is Financial and Political Global Instability. It is hard to ignore the fact that Bitcoin was introduced to the world at the very end of the 2008 Financial Crisis, brought into the news by Wikileaks after they were banned from standard means of financing in 2011 and took off exponentially during the Cyprus Money Grab in 2013.

Another big driver of price in the negative direction this year besides this dynamic of oversupply (too many places to spend btc that gets converted to fiat right away on exchanges) vs insufficient demand (people willing to hold and use bitcoins) are the regulatory indecisions.  Unlike instability in Finance or Politics, indecision in regulation creates paralysis in the system. People do not know where they stand legally, but they are more than happy to use the benefits of bitcoins (micropayments, no chargebacks, cheaper global transactions) without taking on any of the legal risks that come with holding on to the bitcoins and using it themselves. But it’s this risk that is the main driver of Bitcoin’s price so any merchants that think they are part of the Ecosystem and helping it grow by slapping a Coinbase or BitPay button on their website is greatly mistaken. Yes some businesses are on such thin margins that they cannot take on the price volatility risk, but those that can, they need to strongly reconsider their position if they believe in what Bitcoin can become. One final note on the regulatory front is a message to the big Bitcoin organizations that are now working with regulators. You may think you are helping the Ecosystem but the dynamics are more complicated than they seem.

“If there is one thing that Government is good at, it’s wasting other people's hard earned wealth. Organizations that work with government to help it do this job, eventually begin to fall in the same boat.”

– Tone Vays

All that wasted money going to educate regulators and paying lobbyists to put the ‘proper’ chains on Bitcoin can be spent in other ways, like paying developers to make the system stronger and more resistant to the government chains that will eventually come. More importantly however, we need to educate consumers as to why Bitcoin might play a role in their financial survival in the near future instead of the ‘class’ that makes laws for them. Let the regulators adjust to what the people want not the people adjust to what the regulators want.

In other news, it was great to see properly written articles everywhere that Bitcoin was not confused with being a Ponzi Scheme in a recent court case where a bad actor was just using Bitcoin as the medium to run a Ponzi Scheme. Current laws work just fine and this person should spend significant time in jail. But as long as people continue to hand over their Private Keys it will be hard to get proper mass adoption in this space. Also the expected debacle at Butterfly Labs will bring some bad publicity to the space, but just like the Mt. Gox incident, permanently removing bad companies without any bailout will strengthen the community as better companies fill the void.

Daily Overview

That was clearly a longer than usual run at Fundamentals. Even pure Technical Analysts should not forget that it’s the main driver of the overall trend. So for the finer details, we of course turn to our trusted TA because unlike everything in the sections above, numbers do not lie, you just need to interpret them correctly. Here is our 1-year Daily chart still referencing Fibonacci Retracements and a few Trend Lines broken back in July

This ‘intermediate’ term time frame remains Bearish. In fact we are sitting at the exact same level we were at this time last week only the overall picture has gotten weaker. Last time we were coming up from oversold conditions while this time around we are coming down from overbought. The price had rebounded into resistance in our US$440-460 zone but is now appearing to be losing US$400. A close below US$390 will most likely test September lows and once US$380 is lost our next line of defense is the US$340-350 area which no one wants to see fail.

Unlike last week where we considered this Short-Term view Bullish and ready for a rebound, the one that took place was not big enough to make any significant new highs. Now that we are back down to the start of the rally and even fell below the round number of US$400 this time frame is also leaning bearish. There is always a possibility for a reversal to test the US$450 area one more time, but the odds overwhelmingly favor continued downside into the US$340-350 area


Our overall stance remains Long-Term Bearish (with still limited downside), Intermediate-Term Bearish and now also Short-Term Bearish.  As much as this analyst hopes to be wrong, Bitcoin’s price is sitting at its most vulnerable point of the year. The highest probability move is the creation of new lows in the mid US$370’s and the most likely target for a potential stop to the slide in price is the US$340-350 area matching the lows of April. Falling below that zone we are looking at US$260-270 for the next high probability reversal.

We will also remain diligent of the following situation listed in order of importance.

Bearish: As mentioned above, but re-emphasized here, a loss of the US$340-350 zone would most likely bring about a drop into the US$260 area unless we get some positive news (Financial or Political Problems Globally or perhaps get lucky about the round number of US$300).

Bullish: All talk of a potential bullish run will only begin upon a visible creation of a new High. At the moment this stands at US$450.  Only if the price reverses and breaks this area will we consider thinking about a potential change in trend.

Reference Point:  Sunday 11:15 am ET, Bitstamp Price US$390

About the author

Tone Vays is a 10 year veteran of Wall Street working for the likes of JP Morgan Chase and Bear Sterns within their Asset Management divisions. Trading experience includes Equities, Options, Futures and more recently Crypto-Currencies. He is a Bitcoin believer who frequently helps run the live exchange (Satoshi Square) at the NYC Bitcoin Center and more recently started speaking at Bitcoin Conferences world wide. He also runs his own personal blog called LibertyLifeTrail.

Disclaimer: Articles regarding the potential movement in crypto-currency prices are not to be treated as trading advice. Neither CoinTelegraph nor the Author assumes responsibility for any trade losses as the final decision on trade execution lies with the reader. Always remember that only those in possession of the private keys are in control of the money.

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